Ostrich behavior in a dire debt crisis

View full sizeThe Associated Press/Rich PedroncelliA “no trespassing” sign hanging from a fence surrounding an office complex in Sacramento, Calif., where construction was halted in November, symbolizes the deep problems facing the nation’s most populous state. California faces a $20 billion budget gap during the next 17 months as a result of the recession and poor budget decisions by Gov. Arnold Schwarzenegger and state lawmakers, according to a report issued by the California legislative analyst’s office. By DAVID REILLY

When it comes to America's AAA debt rating, we have to ask whether we would be better off without it.

That notion is pure heresy, and Treasury Secretary Timothy Geithner was quick last weekend to try and dispel any thought that the United States would ever be in for a downgrade.

"That will never happen to this country," Geithner said during an interview with ABC News. The remark came after Moody's Investors Service said the pristine U.S. rating will come under pressure unless something is done about mounting deficits.

Geithner shouldn't have fought Moody's report. He should have embraced it. What better way to impress on Congress that the United States is very much in crisis and needs to face up to its problems?

That reality has yet to set in on Capitol Hill. Two weeks ago, for example, the Senate shot down a proposal to create a deficit-reduction commission. The measure failed because the Left worries such a committee will cut spending, while the Right is afraid it will call for tax hikes.

So, no spending cuts or tax hikes, which is what we need -- just deficits as far as the eye can see. Let's break out the fiddles already and watch Rome burn.

This is why concerns about the so-called PIGS -- Portugal, Ireland, Greece and Spain -- or those on the geographic and economic periphery of the European Union, are really a sideshow. The real danger to markets lies with the DOLTS, or Dangerously Over-Leveraged Triple-A Superpowers.

That club consists of the United States.

So far, membership has allowed the U.S. and its elected representatives to pretend urgent action isn't needed. After all, DOLTS have the world's reserve currency and nukes.

This supposedly means we can spend our way out of debt because creditors such as China will forever lend us money. Failing that, we can just print more dollars.

Yet even these benefits can't change the fact that the U.S. is on an unsustainable course with deficits rising, the national debt soaring and Social Security and Medicare preparing to go bust. At 10 percent of gross domestic product, the $1.6 trillion budget deficit for 2010 forecast by the Obama administration ranks as the highest such ratio since World War II.

The administration predicts that this ratio will fall to about 4 percent by 2015. For that to happen, though, the economic recovery mustn't sputter.

Debt, meanwhile, is set to climb to 77 percent of gross domestic product by 2019, according to Moody's, while "debt affordability would be weakened by higher interest costs in the next several years." That compares with government expectations at the end of 2008 of a future debt-to-GDP ratio of about 40 percent by the end of this decade.

No wonder investors such as Marc Faber, who publishes the GloomBoomDoom.com report, say the U.S. would carry a below-investment grade, or junk, rating if the country were a company.

And starting in 2020, things will get even worse. "It is worth noting that after 2019 is when the most serious pressures resulting from Social Security, Medicare and Medicaid will develop, so that failure to rein in the deficits would make it even more difficult to deal with such pressures," Moody's said in a credit opinion.

State and local governments also are in crisis, and, like their federal counterparts, are unwilling to face the harsh reality confronting them.

The mire facing California, for example, makes Greece's woes look somewhat manageable. California, staring at a $20 billion budget gap during the next 17 months, accounts for about 13percent of the U.S. economy. Greece accounts for just 3 percent of the economy of countries that use the euro.

Things are so bad in Nevada, meanwhile, that the state could lay off every worker paid from its general fund and it would still be $300 million in the red, according to state Assembly Speaker Barbara Buckley.

Given all this, Geithner should be using Moody's AAA talk as a cudgel to beat some reality into congressional heads. So far, though, President Barack Obama has preferred to kowtow to House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid, rather than lead them.

From the earliest days of his administration, Obama has tried to appease both, or stood by as they hijacked and then wrecked his initiatives. This started with Obama's acquiescence to a pork-laden stimulus bill and continued as the president gave Congress control over initiatives like the health-care overhaul and financial reform.

The result is that the government has accomplished little in the face of the greatest financial crisis since the Great Depression. And things may easily get worse.

An emboldened and divided Congress, meanwhile, shows no sense of recognizing the true extent of the meltdown. Unless it gains a sense of immediate danger, there's little chance it will do anything differently.

So, while the threat of a downgrade might be unsettling, allowing the country to continue along its present course is far worse.